Mongolia holds rate, but warns it may adjust policy

     Mongolia's central bank left its main interest rate steady for the fourth time and while its policy stance continues to support the economic recovery, it warned "the necessary policy adjustments will be made as the economic recovery stabilizes and inflation exceeds the target level permanently."
     The Bank of Mongolia (Mongolbank) kept its policy rate at 6.0 percent, unchanged since November last year when it was lowered for the fourth time to cushion the economy during the negative impact from the spread of the COVID-19 pandemic.
     Mongolbank provided fresh funds for long-term financing but once again lowered the amount.
     For the fourth quarter, the central bank will provide up to 100 billion tughrik in long-term refinancing, down from 250 billion in the third quarter and 350 billion in both the first and second quarters.

     Last year Mongolbank cut is policy rate by a total of 500 basis points from March through November and also lowered banks' reserve requirements, suspended debt-service-to-income ceilings on loans and began to provide longer-term financing to banks.

     After stabilizing between 2 and 3 percent from October through March, inflation in Mongolia has picked up speed in the last five months and rose to 8.9 percent in August from 7.4 percent in July, topping the central bank's target range of 4.0 to 8.0 percent around a 6.0 percent midpoint target.

     In Mongolia's capital of Ulaanbaatar, inflation hit 9.1 percent in August.

     The rise in inflation is mainly driven by the comparison to low inflation last year and transitory factors though the economic recovery is also pushing up inflation, the central bank said, adding it expects inflation to continue to rise but then stabilize around its target in the second half of 2022.

     "Nevertheless, due to the global economic recovery and international supply chain and logistics disruptions, foreign inflation, world food and oil prices may rise more than our expectations and domestic supply-side inflation may increase, leading to the potential risk in headline inflation," the bank said.

      The improvement in the global economy has had less of an expected positive impact on Mongolia's economy, the bank said, with growth lower than expected in the previous quarter, mainly due to delays in imports, past quarantine measures and sluggish growth in construction, manufacturing and services.

      Mongolia's gross domestic product grew by 6.3 percent year-on-year in the second quarter, down from 14.8 percent in the first quarter.

 

     The Bank of Mongolia issued the following statement:

    

     

"The Monetary Policy Committee (MPC) of the Bank of Mongolia held a scheduled meeting on September 16th, 2021. Due to the current state of the economy and financial markets, while considering the future outlook and risks inherent in domestic and foreign environments, the MPC decided to:

1.      Keep the policy rate unchanged at 6 percent;

2.      Provide up to MNT 100 billion under the Bank of Mongolia’s long-term repo financing instrument in the fourth quarter of 2021.

Annual headline inflation reached 8.9 percent nationwide and 9.1 percent in Ulaanbaatar city as of August 2021. Even though the economic recovery pushed inflation to rise at certain extent, inflation is mainly driven by base year effects and transitory factors.  As a result of latter, the headline inflation may continue to rise, however, it is expected to stabilize around the central bank’s target level in the second half of 2022. Nevertheless, due to the global economic recovery and international supply chain and logistics disruptions, foreign inflation, world food and oil prices may rise more than our expectations and domestic supply-side inflation pressure may increase, leading to the potential risk in headline inflation.

Global economic growth has accelerated, and the prices of exporting goods have remained high, but its positive impact on domestic economy remained less than expected. Although the Government and Central bank’s policy measures supported the economy, the growth was lower than our expectation in the previous quarter, largely due to the import delay, past quarantine measures and sluggish growth in the construction, manufacturing and services sectors. The continuing spread of new variants of the Covid-19 virus around the world reducing the effectiveness of vaccinations and increasing caution, are creating more uncertainty in the global and domestic economic environment.

During the times of economic downturn caused by the pandemic, the Central bank’s monetary and macro-prudential policy, and financial support measures are contributing to facilitate economic recovery and ensure banking sector stability.

The current monetary policy stance is consistent with the purpose of stabilizing inflation and supporting the economic recovery, but the necessary policy adjustments will be made as the economic recovery stabilizes and inflation exceeds the target level permanently.

Extracts of the meeting minutes will be released in two weeks on the Bank of Mongolia website."

    www.CentralBankNews.info